Why iLike Sold For Peanuts

The recent distressed exit of iLike reminds us of the
need to build real value in our startups if we hope to create
lasting companies and wealth.

I have seen cycles that last about 18 months or so in which
traction gets substituted for value. Yes, we’ll sometimes see
exits with big numbers attached to them during the peaks of these
cycles. But only those companies that have built real value will
sustain valuations during lean years and create long-term
successful companies.

If we look over the past fifteen years of webtime, we see a few
categories emerge where real value was created:

Efficiency/Cost Reduction (DoubleClick, RedHat, PayPal,
Craigslist)

Monetizeable audience (Yahoo!, Google, AOL)

Repeat customer commerce (Amazon, eBay, Netflix)

Solve a pain point (Checkpoint, Postini)

Create new markets (EA, Google)

The aberrations occur when traction looks like value. When
Slide was
funded at a $500M pre-money valuation, that
was an example of traction being confused for value. Sure people
posted their pictures using a Slide widget 150M times, but there
was no value created. Slide did not have a real relationship with
those customers and it was a stretch to believe that an ad model
would occur on top of those photo widgets. Similarly, iLike may
have had its application installed by 50M users, but those
“customers” were simply indicating a band or two that they liked.
This is not valuable data and the audience was never monetized in
any meaningful way.

Another aberration was around CBS’s purchase of Last.FM for $280M. Last.FM had
lots of users using its free service (something like 15M). But
supporting those users was expensive (bandwidth, music rights)
and the users weren’t paying. CBS viewed it at the time as a play
for audience, and that makes sense. But at that price, a more
successful ad model would need to emerge to overcome the content
and bandwidth costs. As soon as the ad market hiccuped, that
price looked exorbitant and indeed now traffic has declined and its business model
unproven.

It bears noting that traction often precedes value. As VCs, we
often look for early traction when vetting companies. But we also
need to believe, and so should entrepreneurs, that the traction
will result in an asset being created which has value. In
Twitter’s case, the value of the collective shared links, I
believe, will prove to be enormously valuable. In addition,
creating a platform where consumers willingly subscribe to brands
or information sources also has value.

I think we have returned to a time where eyeballs don’t
necessarily equate to value, and rightfully so.